Item 1.01 |
Entry Into a Material Definitive Agreement |
Purchase Agreement
On
September 15, 2022 (the “Effective Date”), Applied Optoelectronics, Inc. (“AOI” or the “Company”)
and Prime World International Holdings Ltd. (the “Seller”), which is a company incorporated in the British Virgin Islands
and wholly owned subsidiary of AOI, entered into a definitive agreement (the “Purchase Agreement”) with Yuhan Optoelectronic
Technology (Shanghai) Co., Ltd. (the “Purchaser”), which is a company incorporated in the People’s Republic of
China (“PRC”). Pursuant to the Purchase Agreement, among other things, AOI would divest its manufacturing facilities
located in the PRC and certain assets related to its transceiver business and multi-channel optical sub-assembly products for the internet
datacenter, fiber-to-the-home (“FTTH”) and telecom markets (the “Transferred Business”). AOI would
retain its manufacturing facilities in Taiwan and Sugar Land, Texas, as well as assets related to its cable television (“CATV”)
business and to its manufacturing of lasers and laser components for the internet datacenter, FTTH, telecom and CATV markets. The
closing of this transaction (the “Closing”) is subject to regulatory approvals and closing conditions as described
below and set forth in the Purchase Agreement. AOI anticipates that the transaction will not be completed until 2023.
Transaction Structure; Reorganization
This transaction is structured such that Global
Technology Co., Ltd., a company incorporated in the PRC and wholly-owned subsidiary of the Seller (the “PRC Subsidiary”),
would become a wholly-owned subsidiary of a new company that the Seller will establish in Hong Kong ( “Newco”), and
then the Purchaser would purchase from the Seller all of the share capital of Newco (such shares, the “Newco Shares,”
and such transaction, collectively, the “Newco Sale”). Prior to consummating the Newco Sale, the Seller will contribute
to Newco 100% of its equity interests in the PRC Subsidiary, such that the PRC Subsidiary will become a wholly owned subsidiary of Newco
(the “Reorganization”). As a result of the Reorganization and Newco Sale, upon the Closing the PRC Subsidiary will
be indirectly wholly owned by Purchaser.
Purchase Price; Use of Proceeds
The purchase price payable by the Purchaser to
the Seller will be an amount equal to the $150,000,000 USD equivalent of Renminbi (the “Purchase Price”), less a holdback
amount as described below (the “Holdback Amount”) (the Purchase Price less the Holdback Amount, the “Initial
Consideration”).
The
Holdback Amount will be based on the aggregate value of certain inventory of the PRC Subsidiary that is held for sale to or through AOI,
which value will be determined based on an audit of the PRC Subsidiary’s financial statements (the “Completion Audit”).
The Completion Audit is to be conducted only after certain filings are made with the Committee on Foreign Investment in the United
States (“CFIUS”) and CFIUS notifies the parties that it has concluded that the transaction is not subject to review
under Section 721 of the U.S. Defense Production Act of 1950, as amended, including implementing regulations (“DPA”),
or that CFIUS has completed all action under the DPA with respect to the transaction (as applicable, the “CFIUS Approval”).
As a result, the size of the Holdback Amount will not be known until the CFIUS Approval is obtained and such Completion Audit is conducted.
Half of the Initial Consideration will be paid
to the Seller upon the later of (i) the issuance of the Completion Audit, and (ii) the Purchaser obtaining certain outbound direct investment
filings, approvals, and/or certificates from the competent Development and Reform Commission and Commerce Department of the PRC and the
outbound direct investment foreign exchange registration with a competent bank designated by the State Administration of Foreign Exchange
of the PRC (collectively, the “ODI Approval”). The Purchaser will pay the Seller the remainder of the Initial Consideration
at the Closing.
Amounts from the Holdback Amount will be released
to the Seller after the Closing in monthly installments equal to the value of certain inventory of the PRC Subsidiary depleted during
the applicable month, for twelve months or until all of such inventory has been depleted.
As a condition to Closing, the Seller will be
required to use a portion of the Initial Consideration to (i) repay certain account payables owed by AOI or its affiliates to the PRC
Subsidiary as of the reference date for the Completion Audit; and (ii) provide payment for all of the then outstanding principal amounts
and accrued interests of the secured borrowings of the PRC Subsidiary (which payments are subject to reimbursement at Closing) and cause
any liens on the PRC Subsidiary’s real property securing such borrowings to be released. Similarly, within seven (7) business days
after the Closing, the Purchaser will be required to pay all account payables owed to AOI or its affiliates (excluding the PRC Subsidiary
and Newco) as of the reference date for the Completion Audit. The net impact of these obligations to settle inter-company balances cannot
yet be determined.
The Seller will also be required to make capital
contributions to the PRC Subsidiary in an amount determined with reference to (i) fifty percent (50%) of the difference between the PRC
Subsidiary’s net asset value as of December 31, 2020 and June 30, 2022, which is estimated to be $6.3 million, and (ii) the difference
between the PRC Subsidiary’s net asset value as of June 30, 2022 and its net asset value as of the reference date used for the Completion
Audit, which amount cannot yet be determined.
Prior to the Closing, AOI anticipates investing
an amount equal to between 4% and 10% of the estimated proceeds from the transaction in exchange for a 10% equity interest in the Purchaser.
Additional details regarding such investment are subject to further negotiation between the parties.
AOI currently intends that the remainder of the
net proceeds from the transaction would be used for general working capital purposes.
Representations and Warranties; Covenants
Pursuant to the Purchase Agreement, the Seller
and the Purchaser made customary representations and warranties for transactions of this type. In addition, the Seller agreed to be bound
by certain covenants that are customary for transactions of this type, including obligations to operate its businesses in the ordinary
course and to refrain from taking certain specified actions without the prior written consent of the Purchaser, in each case, subject
to certain exceptions and qualifications. Additionally, for a period of seven years from the Closing, the Purchase Agreement restricts
the ability of the Seller and its affiliates to engage in businesses competitive with the Transferred Business anywhere in the world,
and restricts the ability of the Purchaser and its affiliates to engage in the CATV business in North America for a period of seven years
from the Closing as long as the PRC Subsidiary is AOI’s largest supplier of networking products for CATV.
Conditions to Closing
The Closing is subject to the satisfaction or
waiver of certain closing conditions, including, without limitation: (i) the parties obtaining CFIUS Approval, (ii) the Purchaser obtaining
the ODI Approval, (iii) approval of the Newco Sale and related transactions by the Company’s stockholders or the Company’s
receipt and delivery to the Purchaser of an opinion of Delaware counsel confirming that such stockholder approval is not required pursuant
to the Delaware General Corporation Law, and (iv) completion of the Reorganization.
Termination
If any of the conditions to Closing have not been
satisfied by 5:00 p.m. Beijing time on the date that is nine months after notice of the Newco Sale is filed with CFIUS or such later date
as the Seller may agree, then the Purchase Agreement will automatically terminate with immediate effect. In addition, the Purchase Agreement
may be terminated at any time prior to the Closing by either the Purchaser or the Seller if the Closing does not occur as a result of
the other party failing to comply with certain obligations, including, among others, (i) the Purchaser’s payment of the Purchase
Price, (ii) delivery to the other party of evidence that such party is authorized to execute the Purchase Agreement, and (iii) delivery
to the other party of an executed instrument of transfer in respect of the Newco Shares.
If the Purchase Agreement is terminated for certain
specified reasons prior to the Closing, the Purchaser or the Seller, as applicable, will be required to pay a breakup fee equal to 2%
of the Purchase Price. The breakup fee payable by the Purchaser may be reduced to 1% of the Purchase Price if such termination is a result
of the Purchaser’s failure to obtain the ODI Approval due to Purchaser’s breach of certain of its obligations under the Purchase
Agreement. No termination fee applies in the event the Purchase Agreement is terminated due to a failure to receive CFIUS approval, provided
that the parties comply with their obligations to seek CFIUS approval.
Ancillary Agreements
The
Purchase Agreement requires that the parties enter into a (i) Trademark License Agreement, pursuant to which AOI will license certain
trademarks to the PRC Subsidiary and the Purchaser, (ii) Technology Cross-License Agreement, pursuant to which the certain intellectual
property will be licensed to certain licensee(s), (iii) Product Supply Agreement, pursuant to which the Purchaser will purchase certain
products and services from AOI, and (iv) Contract Manufacturing Agreement, pursuant to which, the PRC Subsidiary and the Purchaser will
manufacture and sell certain products and services to AOI (collectively, the “Ancillary Agreements”). In addition,
the parties agreed that certain patents and applications for patents owned or registered by AOI and the Seller and used for the Transferred
Business will be transferred to the Purchaser pursuant to a patent transfer agreement to be entered into after the Closing.
The foregoing descriptions of the Purchase Agreement,
Trademark License Agreement, Technology Cross-License Agreement, Product Supply Agreement and Contract Manufacturing Agreement do not
purport to be complete and are qualified in their entirety by reference to the full text thereof, copies of which are filed with this
Current Report on Form 8-K as Exhibits 2.1, 10.1, 10.2, 10.3, and 10.4, respectively, and incorporated herein by reference. The Purchase
Agreement and the Ancillary Agreements provide investors with information regarding their terms and are not intended to provide any other
factual information about the parties. In particular, the assertions embodied in the representations and warranties contained in the Purchase
Agreement were made only to the parties to the Purchase Agreement as of the dates specified in the Purchase Agreement. Moreover, certain
representations and warranties in the Purchase Agreement may have been used for the purpose of allocating risk between the parties rather
than establishing matters of fact. Accordingly, you should not rely on the representations and warranties in the Purchase Agreement as
characterizations of the actual statements of fact about the parties.
Additional Information and Where to Find
It
This Current Report on Form 8-K relates to a proposed
transaction involving the Company. In connection with the proposed transaction, the Company will file relevant materials with the
SEC if and when required, which may include pro forma financial information reflecting the disposition of the Transferred Business under
Item 9.01 of Form 8-K following the Closing. Stockholders of the Company and other interested persons may obtain more information regarding
the names and interests in the proposed transaction of the Company’s directors and officers in the Company’s filings with
the SEC, including the Company’s Annual Report on Form 10-K for the year-ended December 31, 2021, which was filed with the SEC on
February 24, 2022. The documents filed with the SEC may be obtained free of charge at the SEC's website at www.sec.gov or from the Company’s
website at www.ao-inc.com.
Cautionary Statement Regarding Forward-Looking
Statements
Certain statements in this Current Report on Form
8-K are “forward-looking statements.” These statements relate to future events or the Company’s future financial performance
and involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance
or achievements of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements.
In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,”
“would,” “should,” “expect,” “forecast,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “poised,” “predict,” “potential”
or the negative of those terms or other comparable terminology. The Company has based these forward-looking statements on its current
expectations, assumptions, estimates and projections. While the Company believes these expectations, assumptions, estimates and projections
are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which
are beyond the Company’s control, including: important factors, including risks relating to, among others: risks related to the
Company’s ability to complete the Newco Sale on the proposed terms and schedule or at all; the risk that certain closing conditions
may not be timely satisfied or waived; the failure (or delay) to receive the required regulatory or other government approvals relating
to the transaction; and the occurrence of any event, change or other circumstance that could give rise to the termination of the Purchase
Agreement.
When considering forward-looking statements, investors
should keep in mind the risk factors and other cautionary statements set forth in the Company’s Annual Report on Form 10-K and Quarterly
Reports on Form 10-Q and the other reports that the Company files with the SEC, from time to time. Except as required under applicable
law, the Company assumes no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements
made by it, whether as a result of new information, future events or otherwise.